Purchasing and Supply Management

MGT 634 Purchasing and Supply Management
Dr Atul Kanyalkar
The Course Objective

To
provide an overview of the Purchasing and Supply Management (PSM) Function understand the processes, procedures and policies followed in PSM provide a brief understanding about PSM functionalities in
ERP systems
provide the information about the tools and trends in PSM.
MGT634 Purchasing and Supply Management
At the end of this course

You will be able to
Appreciate the significance of PSM function in

an organization
Appreciate relevance of various processes

followed in PSM function
Understand relevance of ERP in PSM.

Procurement-Production-Distribution System
Supplier 1
Selling Location 1
Port Supplier 2
Manufacturing Plant
Selling Location 2
Supplier 3
Selling Location 3
Inbound logistic or Procurement
Production
Outbound logistic or Distribution
Supply Chain
Selling Location 1
Port 1
Own Manufacturing Plant 1 TP Manufacturing Plant 2 LL Manufacturing Plant 3 HUB
Selling Location 2 Selling Location 3
Supplier 1
Supplier 2
Stockiest Retailer
Selling Location 4 Selling Location 5 Selling Location 6
Port 2
Procurement
Production
Distribution
The syllabus
1. 2. 3. 4. 5. 6. 7. 8. 9. PSM Concepts Staging Policies and PSM Purchasing Process Make or buy decisions Purchase Negotiations Ethics in Purchasing Legal Aspect in Purchasing EDI and e-sourcing Vendor development and evaluation
The syllabus
10. Vendor Managed Inventory 11. Vendor Performance Measurement 12. Capital Equipment Purchasing 13. Service Sourcing 14. Multi-Location Procurement Problem 15. Purchasing Functionality in ERP 16. Business Planning 17. Supplier Certification
The syllabus
18. Material Storage and Warehouse Activities 19. Warehouse Utilization 20. Safety and Security Aspect 21. Obsolescence 22. Disposal of scrap 23. Material Handling 24. ERP in Warehouse 25. New Product Development
References
1. 2. Dobler D. W. and Burt D. N., Purchasing and supply management, Tata McGraw-Hill Publishing company, 1996. Monczka R., Trent R. and Handfield R., Purchasing: An integrated supply chain approach, South-western Cengage Learning. 2005. Coyle J.J., Bardi E.J. and Langley(Jr.) C.J., The management of business logistics, 7th ed., South-western Cengage Learning, 2003. Tony Arnold J.R. and Chapman S.N., Introduction to Materials Management, 5th ed., Pearson Education, 2004. Cases and papers provided time to time
3.
4. 5.
Class Discipline
Attendance
Class timings (attendance will be taken at the beginning) Audit Attendance and minimum passing criterion Academic Dishonesty
Course Evaluation
1. Assignments (30%)
Case Analysis / Paper Reviews (Group & Individual) : [30%]
Tests
2. End-term Test:
(70%)
[20%] * [50%] *
1. Mid-term test & class tests:
* Closed Book
Teaching Sequence
Mon 3 10 17 24 1 8 15 22 29 Tue 4 11 18 25 2 9 16 23 30 Wed 5 12 19 26 3 10 17 24 31 Thu 6 13 20 27 4 11 18 25 1 Fri 7 14 21 28 5 12 19 26 2 Sat 1 8 15 22 29 6 13 20 27 3 Sun 2 9 16 23 30 7 14 21 28 4
Sep
Oct
Introduction to Purchasing and Supply Management
Purchasing Supply Management : Terms

2nd Tier Supplier 1st Tier Supplier Purchasing
Manufact. & Distribution
Marketing
Customer
Value Chain Management
Supply Chain Management
Demand Chain Management Business Logistics
Logistics Management Purchasing and Supply Management Physical Distribution
Purchasing and Supply Management : Definitions

Supply Management
It is the process responsible for the development and management of a firms total supply system for both internal and external components.
Purchasing
The purchasing function comprises of the essential activities associated with the acquisition of the materials, services, and equipments used in the operation of an organization.
Objectives
Support Production Reduce Cost Of Materials Ensure Consistent Quality Reduce Inventory Investment Improve Corporate Image Supplier Relations Maintenance of Records Preserve and Conserve Materials in Stock Improve Competitive Strength
Purchasing and Supply Management Activities

Materials Planning and Scheduling Make or Buy Procurement (materials, equipments, tools, supplies and services) Transportation Warehousing Salvage and Scrap Disposal
Importance
Purchasing and Supply Management can have a major impact on organization success by influencing:
Cost Quality Sales Profits Product development time
Technologies and innovation Customer service Competitive advantage
Why Purchasing is Important

Industry Materials/Sales Revenue
76% 70% 61% 59% 59% 50% 49% 44% Petroleum Automobile Wood Products Textile Mills Food Manufacturing Machinery Electrical Equipment Computers and electronics

Purchasing as a profit producer
Profit =
Revenues
Cost
Impact of Purchasing on Revenues
Impact of Purchasing on costs
Profit
= Revenues -
Cost

Profit-Leverage Effect
Assuming an 8% margin
Profit (Rs 100,000)
= Revenues -
Cost
-
(Rs 100,000)
Profit (Rs 100,000)
= Revenues
(Rs.1,250,000)
Cost
THEREFORE, in this example, the Profit-Leverage Effect is . . . 1,250 ,000 1
100 ,000
12 .5
0.08
Costs Involved
Basic Cost Of Materials Government Levies And Taxes Ordering Cost Inventory Carrying Cost Packaging And Packing Cost. Material Handling Cost Freight Cost Insurance Cost Wastage During Receipt , Storage etc.
Interdepartmental Relations
Production Sales And Marketing Finance Research And Development Engineering Quality Control Planning Legal Security
Purchasing and Supply Management

Procurement
Material Source Price Quality Quantity Time Place

Storage
Receive Store Track

Usage / Issue
Material Sequence Price Quality Quantity Time Place

Procurement
Storage
Usage
Recap
Introduction
Defn Objectives Activities Importance Costs
Procurement / Storage / Usage
Classification Of Materials
Large number of materials.
Planning, Procurement, storage, accounting of so many materials is a Problem.
Common procedures for Planning, Control, storage, issue, accounting for all materials
Basis Of Classification
Stage of conversion Process
Direct (Raw materials / WIP etc) Indirect
Nature of Material
Finished goods Semi-finished goods
etc.
Staging Policies
Staging Policies
Engineer to Order Design Purchase Manufacture Assemble Ship
Make to Order
Purchase Inventory
Manufacture
Assemble
Ship
Assemble to Order
Purchase Inventory Manufacture
Inventory
Assemble
Ship
Make to Stock
Purchase Inventory
Manufacture
Assemble Inventory
Ship
Engineer to order Make to order Assemble to order
No stock at all. The purchase and order of materials takes place based on the specific customer order. E.g. construction companies and shipyards. Only raw materials and components are kept in stock. Every customer is a specific project. E.g. beer and lemonade cans, basic construction materials Only systems elements, modules or subassemblies are in stock at the manufacturing center, whereas final assembly takes place based on a specific customer order. E.g. cars, computers. Finished products are kept in stock at the end of the production process and are from there shipped to geographically dispersed customers. E.g. dairy products.
Make to stock
Staging Policies
Staging Policies
Make to Order
Purchase Inventory
Manufacture
Assemble
Ship
Assemble to Order
Inventory
Assemble
Ship
Make to Stock
Purchase Inventory
Manufacture
Assemble Inventory
Ship
Engineer to order Make to order Assemble to order Make to stock
Procurement (?), Storage (?), Issue (?) Procurement (?), Storage (?), Issue (?) Procurement (?), Storage (?), Issue (?) Procurement (?), Storage (?), Issue (?)
Procurement Process
1. Need 2. Make or Buy Make
Major elements of the purchasing system

3. Purchase requisitions Article file 4. Supplier selection 5. Quotation 6. Order processing 7. Order monitoring and expediting 10. Supplier evaluation 9. Invoice processing Supplier file Contract file
11. Non-acceptance: return to supplier
8. Incoming inspection and quality control

Staging Policies
Staging Policies
Make to Order
Purchase Inventory
Manufacture
Assemble
Ship
Assemble to Order
Inventory
Assemble
Ship
Make to Stock
Purchase Inventory
Manufacture
Assemble Inventory
Ship
ETO (for each materials)

Requirement Generation Receiving and analysing PR Supplier selection Right price PO Follow up Receiving and accepting Invoice approval and payment
Staging Policies
Staging Policies
Make to Order
Purchase Inventory
Manufacture
Assemble
Ship
Assemble to Order
Inventory
Assemble
Ship
Make to Stock
Purchase Inventory
Manufacture
Assemble Inventory
Ship
MTS (for most materials) Supplier selection Right price

Requirement Generation Receiving and analysing PR PO Follow up Receiving and accepting Invoice approval and payment
1. Need
Reorder point (Office

stationary)
Need
Lot size Lead time MPS / MRP (ETO, ATO, MTS) Lot Size Lead time Dependent Independent Optimization (ETO, ATO, MTS) Lot Size Lead time Dependent Independent
Project Plan (ETO) Technical & Unique requirements Well defined timelines
Need
Capacity Plans (Machines) Technical & Unique requirements Well defined timelines Strategic Plans (Services) Long term decisions Timelines can be uncertain Plan and mitigation plan
2. Make or Buy Decisions
Make or Buy
Strategic decision.
Precisely what business do we really want to be in, to maximize

the use of our core competencies
as we proceed into future.

Make or Buy
Economics: It is not always economical for the companies to make all the materials used in its manufacturing process. Abilities / Technical skills Capacities Quality Design protection Assured supply
Make / Buy ? ?
Making
Lower production cost Unreliable or unsuitable suppliers Assure adequate supply (Quantity) Utilize surplus labor capacity Obtain desired quality Protect special design or quality Expected benefit in long term
Buying
Lower acquisition cost Inadequate capacity Reduce inventory costs Ensure alternative sources of supply Item is protected by a patent or trade license
Make or Buy
Choosing between making or buying an item is largely dependent on the Vertical Integration strategy of a company. Vertical integration - developing the ability to produce goods or services that are previously purchased It can take the form of forward or backward integration.
Forward / Backward Integration
Planned Order
Planned Order
Opening Period ??
Lead Time ??
Purchase Order
Specific Information
Purchase Requisition
Planned Order
General information
Planned order is used for visibility

3. Purchase Requisitions
XXX Department Purchase Department Supplier
Production
Warehouse
Formal communication to Purchase department to initiate procurement activities and procure the material mentioned in the requisition.
The PR Should contain following information
Originator Material Specification
Quantity and Unit of measure

Delivery date and place Any other information Signed (approved) Account to be charged
4. Supplier Selection
Strategic Sourcing Plan

Discovery Evaluation
Selection
Development Management
Strategic Sourcing Plan

Engineer to Order Make to Order Assemble to Order Make to Stock
Discovery
1. Supplies catalogue
2. Print media :Trade directories, trade journals, news papers, yellow pages 3. Salespersons 4. Trade exhibition, fairs, conferences 5. Colleagues in similar field 6. Internet ..
Evaluation
Background Informed
Surveys Financial checks Facility visits Quality Capacity Management / Systems IT Systems -------MGT634 Purchasing and Supply Management
Supplier Selection
Check the following Whether the items were purchased earlier ? (Straight rebuy) Any change since then ? (Modified rebuy / new buy) Are the items similar / related to any other item purchased ? Can we replace the item by any other item which we are currently purchasing ? Are the items standard ?
Supplier Selection
Bidding
Value of Purchase Clear specifications Number of sellers available Vendors interested in order Time
Negotiation
Situations when cost estimates are difficult Price is only the only important factor Supplier may have better knowledge then the buyer
Bidding and then negotiation

Overview of Vendor Selection Criteria
Prioritization Matrix
Weight Quality Reliability Capability Financial Score Weighted Score
Others
Final result
Supplier Development
????????
-Alignment of systems -Alignment of expectations -Knowledge transfers -------MGT634 Purchasing and Supply Management
Managing Suppliers
Feedbacks Situation recheck Corrective actions Realignment
Supplier Selection Issues

Size Relationship Usage of International Suppliers Competitors as Suppliers Countertrade Requirements Social Objective
Pricing
Sources of Price Information

Commodity Markets Exists for basic materials (grain, oil, sugar etc.) Demand and supply Long term prices Price Lists For standard products Vendors catalog Quantity discounts available Price Quotations For both Standard and specialty items Useful for promoting competition RFQ (Should contain the manner in which supplier should submit offers)
Specifications Quantity Period
Price
Negotiations For long term relationships or for high cost items Time consuming Process Can lead to significant quality and price benefits
Total Cost of Ownership

Acquisition Costs Price Planning costs Duties .. Ownership costs Downtime costs Risk Cycle time . Post Ownership Costs Warranty costs Product Liability .. Remember: As a purchasing Manager you should also focus MGT634 Purchasing on suppliers manufacturing cost and Supply Management
Paper Mill Case

Purchased Fabric Belt 12 FT X 60 FT (Circumference) 25000 USD Lasts for 40 days Belts break on the machine Replacement takes 8 Hrs (16 man hours @ 45 USD per hour) Per day downtime cost of the plant 100,000 USD 4 6 belts are kept in inventory Industry average life of a belt is 60 days Benchmark belt life span 470 days @ 500,000 USD There are 20 plants across the world
Negotiations and e-Sourcing/Auctions

Negotiations
Purchase requisitions
Supplier Selection
RFQ / Quotations
E-Sourcing /Auctions
Negotiations / Discussion
Learning Curve
Learning curve
Improvement in output due to learning The learning rate represents productivity improvement as production doubles. Improvement in
Labour work style Process modification Product modification
Applicable when
New product / process Complex product Labour intensive
Learning curve
Cumulative Units (N) 1 2 4 8 Total Labour Hrs (A) 20 34 58 100 Avg Labour Hrs per unit (B) 20 17 14.5 12.5 Learning Rate (%) (C) = (Bn-1-Bn)/Bn-1 15.0 14.7 14.8
16 32
64
168 288
493
10.5 9.0
7.7
16.0 14.3
14.4
Quantity Discounts
Discounts on purchase of higher quantities Tradeoff between
Discounts Inventory carrying costs Storage costs Obsolescence costs
The order uncertainty getting transferred to the buyer.

Quantity Discount
1 Unit @ $ 85 3 Units @ $ 80 6 Units @ $ 70 10 Units @ $ 69
Find Incremental price and units for the order Incremental price per units
Quantity Discount
1 5 Unit @ $ 10 Each 6 10 Units @ $ 8 Each 11- 20 Units @ $ 7.8 Each 21- 100 Units @ $ 7.6 Each
Find Incremental price (for max order) and units for the order. Incremental price per units.
Negotiations
What Is Negotiation?
A process of formal communication, either face-to-face or via electronic means, where two or more people come together to seek mutual agreement about an issue
or issues.
*Purchasing & Supply Chain Management, Monczka, Trent, Handfield
What Is Negotiation?
Involves the
management of time,
information,
and power
between individuals and organizations who are
interdependent
When Negotiation Required?

Is bid process inadequate? Are many non-price issues involved? Is contract large? Are technical requirements complex? Does contract involve plant, equipment or/and customization? Does contract involve a partnership? Will supplier perform value-adding activities? Will there be high risk or uncertainty?
Non-price Negotiation
Quality Specification compliance Support Technical assistance Product research, development, and/or design Warranty Spare parts Training Tooling Packaging Data sharing, including technical data Transportation FOB terms
Performance compliance
Test criteria Rejection procedures Liability
Reliability
Design changes Supply Lead times Delivery schedule Consignment stocks Expansion options Supplier inventories Cancellation options
Carrier
Commodity classification Freight allowance/equalization Multiple delivery points
* From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin MGT634 Purchasing and Supply Management
Negotiation Strategy : Basic Steps

1. Develop the specific objectives (outcomes) desired from the negotiation
2.
3. 4. 5. 6. 7. 8. 9.
Gather pertinent data

Determine the facts of the situation Determine the issues Analyze the positions of strength for both (or all) parties Set the buyers position on each issue, and estimate the sellers position on each issue based on your research Plan the negotiation strategy Brief all persons on the negotiation team Conduct a dress rehearsal (Devils Advocate)
10. Conduct the actual negotiations with an impersonal calmness 11. Record the process and outcome
Negotiation planning and execution
Game plan for Negotiation
The Zone of Negotiation

Seller's Range $220,000 $230,000 $240,000 $250,000 $260,000 $270,000 $280,000 $290,000 $300,000 Buyer's Range
The overlap between what the Buyer will pay and what the Seller will accept defines the
Zone of Negotiation
The Zone of Negotiation

$220,000 $230,000 $240,000 Buyer's Range $250,000 $260,000 $270,000 Seller's Range $280,000 $290,000 $300,000
There is a gap between what the Buyer will pay and what the Seller will accept. There is NO DEAL without Creativity or Compromise
Sources of Negotiating Power

Informational power Access to information to be used for
persuasion using facts, data etc. (Only un/favorable is presented)
Reward power One party can offer something of value expecting

something in return. Give / Take.
Coercive power One party can withdraw something of value. Legitimate power Position of the person Expert power Special form of informational power Referent power Personal qualities and attributes of individuals
Being an Effective Negotiator

Willing to compromise or revise goals View issues independently Establish upper and lower ranges for each major issue Explore additional options Build on common ground between parties Avoid making irritating comments Avoid argumentation by presenting too many reasons (quickly) Make fewer counterproposals
Overcoming Tactics
Modify tactics when they dont work Prepare for likely tactics to be used against you Tactics are more effective on you if you are unprepared, stressed, under severe deadlines, inexperienced, fatigued, or disinterested Try not to react without thinking
Influencing factors in Negotiations

Low ball / High ball Honesty / Openness Questions Breaks Trial Balloon Price increase Best and final offer Silence Planned concessions Venue

Win-Win Negotiation
Win-lose competitive or distributive bargaining Win-win collaboration or integrative bargaining
Win-Win Methods
Expand the pie Ways to expand resources or value obtained Logroll Tradeoff of disagreeing issues Cost Cut Join hands in cutting costs and sharing benefits Bridge Involves inventing new options to satisfy both parties Non specific compensation One party achieves objective
other gets something of value as reward

Ethical Issues
Ethics
The set of moral principles or values guiding our behavior In business, ethical behavior is the use of recognized social principles involving justice and fairness
Rules of Ethical Behavior

Buyers must commit their attention and energies for the employers benefit rather than their own Buyers must act ethically towards suppliers and potential suppliers Buyers must uphold the ethical standards set forth by the profession
Pressures Toward Unethical Behavior

Purchasing has control over large sums of money. Incentives linked to cost reduction. Suppliers may have great pressure to meet aggressive sales goals, leading to questionable sales practices
Risks of Unethical Behavior

The act may also be illegal At a minimum, the buyer may lose his/her job
Personal bankruptcy Jail
There is a risk to a buyers professional reputation Risk to the buying companys reputation
Types of Unethical Behavior

Reciprocity Preferential treatment to suppliers who are also customers to the organization. Personal buying Purchasing for personal needs of the employees. Accepting supplier favors Gifts and favors. Sharp practices Misrepresentation just short of fraud. Financial conflicts of interest investment in other companies.
Reciprocity
Giving preferential treatment to suppliers who are also customers Restrain competition Must rely on legitimate performance criteria to evaluate supplier capability
Personal Buying
Purchasing department purchases materials or goods for the personal needs of its employees Subject to trade diversion laws Some exceptions do exist Often a gray area as to what to do
Accepting Supplier Favors

Accepting gifts May effect a buyers judgment At what point does the gift represent showing appreciation vs. and attempt to influence future buying behavior Gifts from potential suppliers are particularly questionable
Sharp Practices
Willful use of misinformation Exaggerating problems Requesting bids from unqualified suppliers solely to drive down prices from qualified suppliers Gaining information unfairly through deception
Sharp Practices
Sharing information on competitive quotations Not compensating suppliers for design or other work Taking unfair advantage of a suppliers financial situation Lying or misleading
Financial Conflicts of Interest

Direct financial interest in a supplier company Buying companies typically require disclosure by buyers having significant personal financial interest Similar to insider knowledge in buying and selling stocks
Behaviors
Maintain highest standard. No gifts / favors Slow but steady
Remember: These are digital decisions in terms of actions and occurrences

Cases
Gift delivered at home ? Equipment purchased higher then the normal price ? Unwanted equipment purchased ?
Cases
You joined a new company and found that some of the employees are suppliers. Find other employees accepting / demanding gifts from suppliers
Legal Aspects
Contract Terms
Ex-works: In an ex-works contract, the purchaser accepts full responsibility for arranging transportation from the suppliers location. For Purchaser this involves:
Arranging transportation, insurance, and documentation to move the goods to the required source port (air or sea) Have them loaded on to the mode of transport Transported to, and unloaded at the destination port Cleared through customs and transported to the purchasers location.
Contract Terms
Free alongside (FAS): In this arrangement, the supplier agrees to deliver to the (source) port specified by the purchaser For Supplier this involves
Arranging transportation, insurance, and documentation to move the goods to the required source port (air or sea)
For Purchaser this involves

Have them loaded on to the mode of transport Insured, transported to, and unloaded at the destination port Cleared through customs and transported to the purchasers location.
Contract Terms
Free on board (FOB): Here the supplier pays for and arranges loading on to the outward-bound transportation and thereafter the purchaser becomes responsible. For Supplier this involves
Arranging transportation, insurance, and documentation to move the goods to the required source port (air or sea) Have them loaded on to the mode of transport

Insured, transported to, and unloaded at the destination port Cleared through customs and transported to the purchasers location.
Contract Terms
Cost and Freight (C&F): This is a split responsibility arrangement in that the supplier arranges and pays for transportation to an agreed point, For Supplier this involves
Arranging transportation, insurance, and documentation to move the goods to the required source port (air or sea) Have them loaded on to the mode of transport Transported to, and unloaded at the destination port

Pay insurance from when the goods are loaded on board. Cleared through customs and transported to the purchasers location.
Contract Terms
Cost, Insurance, and freight (CIF): This is similar to C&F But here the insurance during transportation is responsibility of the supplier. For Supplier this involves
Arranging transportation, insurance, and documentation to move the goods to the required source port (air or sea) Have them loaded on to the mode of transport Insured, transported to, and unloaded at the destination port

Cleared through customs and transported to the purchasers location.
Contract Terms
Delivered: This is the opposite of ex-works in that the supplier has total responsibility for the goods, their transportation, insurance, and all documentation until they are delivered to the purchaser. For Supplier this involves
Arranging transportation, insurance, and documentation to move the goods to the required source port (air or sea) Have them loaded on to the mode of transport Insured, transported to, and unloaded at the destination port Cleared through customs and transported to the purchasers location.
Contract Terms
Contract Terms
Supplier Transport Ex Works Insurance Supplier Purchaser Supplier Purchaser Port Ship Transit Ship Port Purchaser Transport Free Alongside Insurance
Supplier
Purchaser Supplier Purchaser
Transport Free On Board Insurance
Supplier Purchaser
Supplier
Purchaser
Transport Cost and Freight Insurance
Supplier Purchaser Supplier Purchaser
Transport Cost Insurance and Freight Insurance
Supplier Purchaser Supplier Purchaser
Transport Delivered Insurance
Supplier
Purchaser
Supplier Purchaser
EDI and E-Sourcing
Groups and cases

Metal craft (12 Oct) E Sourcing strategy (13 Oct) Bose (19 Oct) Multisite case (20 Oct)
Types of e-Procurement
1. Web-based ERP (Electronic Resource Planning): Creating and approving purchasing requisitions, placing purchase orders and receiving goods and services by using a software system based on Internet technology. 2. e-MRO (Maintenance, Repair and Operating): The same as webbased ERP except that the goods and services ordered are nonproduct related MRO supplies. 3. e-sourcing: Identifying new suppliers for a specific category of purchasing requirements using Internet technology. 4. e-tendering: Sending requests for information and prices to suppliers and receiving the responses of suppliers using Internet technology. 5. e-reverse auctioning: Using Internet technology to buy goods and services from a number of known or unknown suppliers. 6. e-informing: Gathering and distributing purchasing information both from and to internal and external parties using Internet technology. MGT634 Purchasing and Supply
Management
Reverse Auctions
When possible ?
Requirements ?
Steps ?
Reverse Auctions
Problems ?
Electronic Data Interchange

The EDI (Electronic Data Interchange) enables customers and suppliers to electronically exchange transaction information such as PO, invoices, and
MRP.
Simplifications: This eliminates time consuming paperwork and facilitate easy communication between buyer and supplier

External Supplier
RPM Supplier
E-mail to the supplier Uploading the information on the portal
Subcon / TPM
E-mail to the supplier Uploading the information on the portal Linkage through ERP system
Internal Supplier
Intercompany
E-mail to the supplier Linkage through ERP system

Purchaser: Requirement generation Purchaser: Scheduled line is generated against blanket order / Scheduling agreement and sent to the supplier and accounts electronically Supplier: receives and acknowledges the order. Supplier: sends the shipping notification while dispatching the material. Purchaser: records the shipping notification in expected receipt file. Purchaser: on receipt of the material the entry is made against expected receipt and the scheduling line and an intimation is sent to accounts payable. Purchaser: accounts payable dept electronically transfer the payment to the suppliers account. Purchaser: sends remittance advice to the supplier.
Electronic Procurement
Disadvantages Security of electronic messages Lack of face-to-face contact Other technological concerns
Standard protocols System reliability
Purchasing
Purchasers Duties
Know the market for their commodities; ascertaining price Understand the laws (tax, contract, patent) Process purchase requisitions and quotation requests Make supplier selections Negotiate prices and conditions of sale Place, follow-up, expedite purchase orders Supplier relations Maintain ethical behavior
Do you see any problem

Strategic Sourcing and Planner Buyer

Strategic Sourcing

Know the market for their commodities; ascertaining price Understand the laws (tax, contract, patent) Make supplier selections Supplier relations Negotiate prices and conditions of sale Maintain ethical behavior
Determine material requirements Generate purchase requisitions, PO and schedules. Issue and controlling Shop orders for factory Place, follow-up, expedite purchase orders Maintain ethical behavior
Planner Buyer
6. Order Processing
Purchase Order
Significance Parts of PO
Purchase Order.
The PO is a legal offer to purchase. Once accepted by supplier it becomes a legal contract for delivery of goods according to the terms and conditions specified in the purchase agreement.
Major Parts of a P.O.

Fixed prices and quantities (including taxes) Buyers right of inspection and rejection Right to make specification/design changes Holding buyer harmless, patent infringement Suppliers right to assign contract to a third party Instructions regarding risk of loss Statement of credit and payment terms Identification Packing and preparation Statements of warranty
Major Parts of a P.O.

Shipment quantities, dates and place Assignment of sellers rights Arbitration clause Right to cancel unshipped portion And other relevant information etc.
7. Order Monitoring and Expediting
Order Monitoring and Expediting

Significance
Follow-up (Including expedite and de-expediting)

Supplier is responsible for delivery. Purchase department is responsible for ensuring the delivery. Follow-up is required for
Changes in the plans IRA issues QA issues in previous delivery Product structure change etc.
8 Incoming Inspection and Quality Control
Incoming Inspection and Quality Control

Significance
Receiving Warehouse is responsible for receiving the goods. They should confirm
Item Quantity Place Absence of transit damage Open Purchase Order Delivery due date Provide acknowledgement.
Receiving Mark the goods Store the goods Operate information system Communicate to QA and other concerned departments
Self Certification
Self Certification
Significance Where to use
Staging policies Lot size and consumption Stocking policies
Supplier Self Certification

Companies spend a large amount of money on quality inspection of incoming material This is time consuming and complicated.
Supplier self certification is therefore very useful. In this supplier certifies and assures that the quality of the material is as per the company standard. Cost implication ?
Supplier Self Certification

STEPS
Agreeing upon common Specs. Process Parameter standardization. Vendor audits and Inputs. Trial Lots. Roll out.
9. Invoice Processing
Invoice Processing
Significance Factors to be considered
Payment
Accounts is responsible for payment (after QA release of the received material). Three way reconciliation
Suppliers invoice PO Received quantity
To confirm
Conditions Prices Quantities
The accounts should be very efficient and accurate

10. Supplier Evaluation
Supplier evaluation
Why
Better decision making Better communication Feedback Motivate and direct behavior
Problems
Too much data Wrong measures Conflicting measures Drive wrong performance
Performance Measurement - Importance

Systematizes organizational memory Pool information across plants Remove excuse for poor quality Ensure consistent policies across supplier and plants To identify the supplier performance and improvement opportunities. Helps in decision making. Negotiations Resource allocations etc.
Performance Measurement
Characteristics of good performance measure The measurement should be usable. Without any scope for adjustment Communicate / Agreed Simple to measure
Measures
Measures Must Be ... Strategically Significant Driving Right Behaviors Balanced Aligned Owned Linked to Compensation Actionable Easy to Collect
Balance
Balance is Assessed and Viewed Across Three Specific Dimensions: 1. Financial v. Customer v. Process v. People 2. Leading v. Lagging 3. Efficiency v. Effectiveness
Why Does Balance In These Dimensions Matter?
1. Complete Business Perspective 2. Causality 3. Cost (Time, Resources, Investment) & Quality
Balanced Measures
Example Measure Set
Percent Sales from New Products Net Trade Sales Total Growth NPV of NPD Pipeline (NPDC Data) Market Share (TRx) Line Item Fill Rate Percent Growth of Net Trade Sales from Existing Products Manufacturing Compliance Index Adverse Events/Product (Top 5 Products) S/G&A Productivity R&D Productivity Resource Alignment Index Percent Critical Positions Filled
F-C-P-P [1] Financial Financial Financial Customer Process Leading v. Lagging Lagging Lagging Leading Lagging Lagging Effective v. Efficient Effectiveness Effectiveness Effectiveness Effectiveness Effectiveness
Acceptable/ Satisfactory
Financial
Process Customer Process Process People People
Lagging
Lagging Lagging Leading Leading Leading Leading
Effectiveness
Effectiveness Effectiveness Efficiency Efficiency Effectiveness Effectiveness
Caution/ Additional Work Reqd.
Unacceptable; Additional Work Reqd.
[1] Financial v. Customer v. Process v. People (from The Balanced Scorecard)
Balanced Process Measures

Suppliers
S-1 S-2 S-3
Inputs
I-1 I-2 I-3
Process
Outputs
O-1 O-2 O-3
Customers
C-1 C-2 C-3
Input Measures
Process Measures
Outcome Measures
Leading
X X
Lagging Effectiveness
Efficiency X X X
The Operational Definition

A Precise Description that communicates how to arrive at a value for an objective. Identifies Who, What, Where, When, How Who = Measure Owner What = What to Measure (Clear, Specific, Objective) Where = Where the Measure Data Resides When = When Measured & Reported How = How to Measure (Mathematical Formula) (Longer Term)
Measure Playbook
Not all of the Measure Playbook attributes need to be defined at the same time its okay to let them mature as the MGT634 focus matures. measurePurchasing and Supply
Management
Clean Data Display, Control Limits, Mean, and Trend Line and Goal
A Well-Dressed Measure
Quick Reference Legend I.E. Trend Up = Good
4
Title
2 5
Data Legend and Chart and Data Owner Information, Update Frequency
Description, Explanation, and Action Plan
Performance Measurement
SP = Wi X Pi
Wi Weight attached to the performance characteristic i Pi Performance of characteristic I It can be
Quality (material / documentation ) Delivery Quantity Flexibility Technical Contribution etc.
Or treat individual performance characteristic separately.

Measures Implementation
Drive down from OGSM Develop specific measures Identify the base line data Finalize details Communicate and implement Measure and identify projects.
Measures
Engineer to order Make to order
Assemble to order
Make to stock
11 Non Acceptance Return to Supplier
Return to supplier
Based on the PO Local / Imported Rework / Destroy Credit note
Others
Multi-location problem
MSPPDS: Multi-Site Procurement Production Distribution System

Selling Location 1
Port 1
Manufacturing Plant 1
Supplier
Selling Location 4
Port 2
Production
-Alternate sourcing for manufacturing and selling locations -Opportunities for reduction in costs and improved availability represented by solid and dotted lines.
MSPPDS: Multi-Site Procurement Production Distribution System

Selling Location 1
Port 1
Supplier
Selling Location 4
Port 2
Production
-Alternate sourcing for manufacturing and selling locations -Opportunities for reduction in costs and improved availability represented by solid and dotted lines.
EXTENT OF CONTROL
Centralized v/s Decentralized Purchase
Centralized
- Ease Of Operation, buyer specialization, Less ordering cost, control.
- Consistency - Better Pricing, more clout, better continuity - Better Maintenance Of Records
EXTENT OF CONTROL
Decentralized - Better Time To React - Developing Local Vendors - Better Control On Local Vendors - Close Co-ordination with Plant
Optimization
GLPK Path command Program file / Data file Set / Param / Var / Min / Max / s.t. / end.
Simulation
Random parameters interacting with each other. Arena Vensim / Stella
Purchasing Functionality of ERP
ERP - What is it?

ERP is a generic term used to describe a comprehensive information system designed to integrate all the business processes found in an enterprise. Efficiency and productivity are improved through the integration of information and the removal of duplicate information and processes.
MRP OVERVIEW
MRP RUN
PLANNING FILE AND MRP
PLANNING SEQUENCE
BOM EXPLOSION
MRP: NET REQUIREMENT CALCULATION
LOT SIZING PROCEDURES
MRP SCHEDULING
STATIC LOT SIZING PROCEDURES
PERIOD LOT SIZE PROCEDURE
Safety stock
Fixed safety stock Range of coverage Safety days
Purchasing master Data

Vendor master (at client level)
Information about the vendor.
Source list (at Plant level)

The master which links a material to a vendor for a period.
Purchase Info Record (at Plant level)

The master containing pricing and other information of the material if sourced from a particular vendor (This data gets adapted while converting PR to PO)
Purchasing master data

Outline agreement
The agreement against which scheduled lines are generated.
Process
Sourcelist Vendor Purchase Info Record / Scheduling Agreement Quality UD Payment
Purchase Requisition of a material
PO/ Scheduled Line Follow-up Receipt
Business Planning in an ERP system
Business Planning in an ERP System

Once a year activity Based on the Business Plan for the next periods. To arrive at
Annual production plans Standard costs Machine loadings Annual Purchase volumes

The output is used to
Arrive at the variances during the year. Bargain with supplier Decide on the focus cost improvement ideas

1. The business plan is uploaded in System in a scenario. 2. Master data is corrected in the scenario. 3. MPS orders for the Business Plan are generated 4. Machine loading is checked to make appropriate corrections are made. 5. MRP is generated for the entire period using appropriate assumptions 6. Total consumptions is checked.
Material Storage
Why Storage is required ?

Material Handling Material Storage IRA SLOB Pilferage Inventory
Is it only a storage facility?

A warehouse is typically viewed as a place to store inventory. However, in many logistical system designs, the role of the warehouse is more properly viewed as a switching facility as contrasted to a storage facility. Value Addition?
Storage
Objective
Minimize costs Maximize customer service
This is achieved by
Timely customer service Keep track of the items Minimize total physical efforts Provide requisite communication
Storage Costs
Costs
Capital costs
Space Material handling equipments Etc.
Operating costs
Labor costs Etc.
Warehouse Activities
Receive goods
Check the goods against order and Bill of lading Check the quantities Check for damage Inspection if necessary
Identify the goods Dispatch to storage Hold goods Pick Marshal shipment Dispatch Operate Information system
Benefits of Warehousing
Consolidation Break bulk Processing Postponement Stockpiling
Warehouse Location
Warehouse Location
Modeling the supply chain, J F Shapiro (pp 143)
Warehouse Location Objective / Constraints

Modeling the supply chain, J F Shapiro (pp 143)
Objective: Minimization of transportation cost and fixed and variable costs for warehouse
Warehouse Capacity (Supply plan <= Operating Capacity) Transfer Quantity (Transferred quantity from warehouse <= operating
capacity of warehouse)
Demand Satisfaction (Transferred quantity to CFA >= Demand of CFA) Unique Channel Matrix (All product demands of a CFA to be
satisfied by one warehouse)
Channel matrix definition Objective / Constraints

Objective: Minimization of transportation cost
Manufacturing Capacity (Production plan <= Mfg Capacity) Transfer Quantity (Transferred quantity from plant <= Production plan at
plant)
Demand Satisfaction (Transferred quantity to CFA >= Demand of CFA) Unique Channel Matrix (All product demands of a CFA to be
satisfied by one manufacturing plant)
Warehouse Layout
Design Considerations in Warehousing

General considerations
Quantity and character of goods must be known product profiling Know the purpose to be served
Storage Distribution Cross-docking
Warehousing Trade-offs
Fixed / variable slot locations for merchandise Build out (horizontal) / build up (vertical) Order-picking / stock-replenishing functions Two-dock / single-dock layout Labor-intensive / mechanization / automation Space devoted to aisles / space devoted to storage
Warehousing Trade-offs
Paperless warehousing / traditional paperoriented warehousing operations Virtual warehouse / real warehouse Other space needs Retail store rooms
Warehouse
Pallet Positions
1. Per pallet = 30 Cartons 2. For storing 13000 Cartons
(Refer Tony Arnold)
Number of pallet positions on ground required
3. Number of pallets required = 13000/30 =

433.33 = 434 Pallets 4. Three high placement 5. 434 / 3 = 144.67 = 145 pallet positions
Accessibility
Being able to get at the goods wanted with minimum amount of work (directly) 1. Industry
2. Expiry periods
3. Fifo / Lifo etc
Cube utilization
(Refer Tony Arnold)
Use of space horizontally and vertically Number of pallets actually stored / Maximum number of pallets can be stored
Accessibility vs. Cube utilization
Stock Location
Functionally similar items together Fast moving / slow moving Physically similar items Working stock and reserve stock
Stock Location
Point of usage Central storage
Fixed location
Advantages / disadvantages
Floating location
Advantages / disadvantages
Order picking
Picking
Area
Through out the warehouse selecting items for one order
Zone
Picker works in his zone
Single order
Multi order
Warehouse Safety
Warehouse Safety
Safety
Guarding Material safety data sheets Employees safety
Industrial hygiene
Ergonomics
Environment
Spills / incidences Disposals
Security of goods
Pilferage Protection
Shortage (IRA / loss) Brand name issues Etc.
Theft: Protection against theft of merchandise has become a major factor in warehouse operations. No private automobiles All normal precautions employed throughout the enterprise should be strictly enforced at each warehouse. Many are honest mistakes in order selection and shipment, but the purpose of security is to restrict theft from all angles. Security begins at the fence. As standard procedure, only authorized personnel should be permitted into the facility and surrounding grounds and entry to the warehouse yard should be controlled through a single gate.
Computerization
Computerized inventory control and order processing systems help protect merchandise from being carried out of the warehouse doors. No items should be released from the warehouse unless accompanied by a computer release document.
If samples are authorized for use by salespersons, the merchandise should be separate from other inventory.
Scrap Disposal
Salvage and Scrap Disposal

Value of scrap may be income to the firm. Disposal must adhere to environmental regulations. Ensure no possibility of misuse The organizations interest
Inventory Record Accuracy and Cycle count
IRA and Cycle count

Please refer to Tony, Arnold
VMI
Stockless Purchasing
The supplier maintains the inventory for the purchaser. The cost of stocking inventory has been temporarily transferred from the purchaser to the supplier.
NPD
NPD
Timelines based on the understanding / experience Clear expectations beforehand Involve suppliers early
Standardization
Rather than obtaining a variety of components similar in labeling, coloring, packaging, etc. The purchasing agent should try to have those components standardized. For every component that is standardized, There is one less invoice, one less item to be inventoried, etc.
Standardization
Value Analysis
Value analysis
Process of examining all elements of a component, assembly, end product, or service to make sure that it fulfils its intended function at the lowest cost throughout the intended life.
Objective : Increase the value of the product at the lowest cost while maintaining quality. Value = function / cost
Value analysis
Gather information Study Speculate Analyse Recommend Summerize
Value analysis
Separate the object in its component Check the value addition by each component Check the manufacturing process for each component Check the value addition by each process step Apply creativity
Value analysis Team members

Executive management Suppliers Purchaser Design engineer Marketing Production Industrial / process engineer Quality control
Team exercise
Identify Object (and its function) Separate the object in its component (Understand the assembly process) Understand the manufacturing process for each component (and go on further exploding its BOM) Identify the value addition by each process and component Brainstorm
Thanks Best of luck


Purchasing and Supply Management

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MGT 634 Purchasing and Supply Management

The Course Objective

MGT634 Purchasing and Supply Management

At the end of this course

Appreciate the significance of PSM function in

Appreciate relevance of various processes

Understand relevance of ERP in PSM.

Inbound logistic or Procurement

Outbound logistic or Distribution

MGT634 Purchasing and Supply Management

Own Manufacturing Plant 1 TP Manufacturing Plant 2 LL Manufacturing Plant 3 HUB

Selling Location 2 Selling Location 3

1. Mid-term test & class tests:

MGT634 Purchasing and Supply Management

Introduction to Purchasing and Supply Management

Purchasing Supply Management : Terms

Value Chain Management

Supply Chain Management

Demand Chain Management Business Logistics

Logistics Management Purchasing and Supply Management Physical Distribution

MGT634 Purchasing and Supply Management